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Chapter 6: 13RQ (page 357)

How is inventory turnover calculated, and what does it measure?

Short Answer

Expert verified

Inventory turnover is calculated to measure the number of times inventory is converted to sale by comparing the cost of sold inventory against average inventory.

Step by step solution

01

Inventory turnover

Inventory turnover is the ratio between the cost of goods sold and average inventory. It is computed in the following way 鈥�

Inventoryturnover=CostofgoodssoldAverageInventoryAverageInventory=OpeningInventory+ClosingInventory2

02

Inventory turnover measurement

Inventory turnover measures the number of times inventory is sold during a particular period. This is computed by comparing the sold inventory against the average inventory for the period.

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Most popular questions from this chapter

Assume that AB Tire Store completed the following perpetual inventory transactions for a line of tires:

May 1 Beginning merchandise inventory 16 tires @ \( 65 each

11 Purchase 10 tires @ \) 78 each

23 Sale 12 tires @ \( 88 each

26 Purchase 14 tires @ \) 80 each

29 Sale 18 tires @ $ 88 each

Requirements

1. Compute cost of goods sold and gross profit using the FIFO inventory costing method.

Steel It began January with 55 units of iron inventory that cost \(35 each. During January, the company completed the following inventory transactions:

Units Unit Cost Unit Sales Price

Jan. 3 Sale 45 \) 83

8 Purchase 75 $ 52

21 Sale 70 85

30 Purchase 10 55

Requirements

2. Prepare a perpetual inventory record for the merchandise inventory using theLIFO inventory costing method.

When does an inventory error cancel out, and why?

Question:Refer to Short Exercises S6-4 through S6-6. After completing those exercises, answer the following questions:

Requirements

3. If costs had been declining instead of rising, which inventory costing methodwould have produced the highest cost of goods sold?

Fit Gym began January with merchandise inventory of 78 crates of vitamins that cost a total of \(4,290. During the month, Fit Gym purchased and sold merchandise on account as follows:

Jan. 5 Purchase 156 crates @ \) 64 each

13 Sale 180 crates @ \( 100 each

18 Purchase 114 crates @ \) 75 each

26 Sale 150 crates @ $ 116 each

Requirements

1. Prepare a perpetual inventory record, using the FIFO inventory costing method, and determine the company鈥檚 cost of goods sold, ending merchandise inventory, and gross profit.
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